Bank of Canada hikes key rate by 25 basis points to 2.5%

On October 28, 2026, the Bank of Canada increased its target for the overnight rate by 25 basis points to 2.5%. The Bank Rate now stands at 2.75%, while the deposit rate is 2.45%.

Global economic activity has stayed resilient since the July Monetary Policy Report even with higher energy prices. Growth in the United States continues at a robust pace, helped by consumer spending and AI-related investment. The euro area has seen resilient and broad-based growth. After slowing in the second quarter, the Chinese economy rebounded in the third quarter on the strength of exports and a pickup in fiscal spending. With oil prices and refinery margins persistently elevated, inflation has risen in most countries.

Because the global economy remains resilient, the Bank has raised its 2026 forecast for global GDP growth slightly to 3.1%. Projections for 2027 and 2028 are unchanged from July at 3.2%.

Global financial conditions have tightened since July. Sovereign bond yields in advanced economies are higher, and equity and credit markets have been volatile as uncertainty surrounds the outlook for the AI sector. The Canadian dollar weakened a bit against a stronger US dollar but has since recovered to around 71 cents, the same level assumed in the July Report.

Canadian growth picked up through the middle of the year. GDP rose 3.3% in the second quarter, and recent indicators point to growth of about 2% in the third quarter, above what the July Report anticipated. Consumer spending has been solid despite slow population growth. Business investment rebounded, reflecting oil and gas activity and spending on machinery and equipment. Exports have strengthened overall, even with ongoing weakness in sectors hurt by US tariffs, supported by strong US demand, higher energy production and growing signs that businesses are adapting to the changing trade environment. The unemployment rate has been around 6½% for several months, and a broad set of indicators continues to point to some excess supply in the economy.

New US tariffs are expected to slow growth in the fourth quarter of 2026 before activity picks up again in 2027. That rebound is expected to be supported by business investment, exports and fiscal measures. Consumption growth is likely to moderate, while housing should stay relatively weak.

The Canadian economy is projected to grow 1% in 2026 and 2% in both 2027 and 2028. That is a somewhat stronger overall projection than the July Report. Considerable uncertainty remains, particularly around Canada-US trade relations.

Because oil prices are persistently high, CPI inflation has been around 3% since April and is expected to rise to about 3½% by the end of the year. Excluding gasoline, inflation was 2.2% in September, and core inflation measures remain close to 2%. Cost pressures are building, however, as high fuel prices raise production and transportation costs. Imported industrial and electronics input prices have also climbed. Businesses have mostly absorbed higher input costs so far, but Bank surveys suggest cost pass-through will increase over the next year. Near-term household and business inflation expectations have risen, while longer-term expectations remain well anchored.

The Middle East conflict is now in its eighth month, with no clear path to resolution. Higher-for-longer energy prices and increased pass-through add to the persistence of inflation in the projection. CPI inflation is expected to average 3% in 2027, one percentage point above the July projection, before easing to 2% in the middle of 2028. The main sources of uncertainty are developments in the Middle East and how businesses respond to cost pressures.

In the Bank's outlook, inflation is higher and more persistent than in the July Report, while growth has picked up and is expected to recover further. Against that backdrop, Governing Council decided to raise the policy rate to reduce the risk that continued high energy prices spread broadly to other goods and services. Further rate increases could be needed, but given the uncertainties, Governing Council agreed to proceed carefully. The Bank remains committed to maintaining Canadians' confidence in price stability.

The following are the opening remarks from Bank of Canada Governor Tiff Macklem.

Macklem opened with a good morning and said he was pleased to be joined by Senior Deputy Governor Carolyn Rogers to discuss the policy announcement and the Bank of Canada's Monetary Policy Report.

The policy interest rate was raised by 25 basis points today, bringing it to 2.5%, he said. That marked the first rate increase since July 2023.

There have been two important economic developments since July, Macklem said.

First, the inflation outlook has deteriorated. With the war in the Middle East continuing, global oil prices have climbed and are expected to remain higher for longer. That is hitting Canadians at the gas pump and increasing costs for many businesses.

Second, Canada's growth outlook has improved modestly despite continued trade actions by the United States. Growth picked up through the middle of the year, and exports as well as business and government investment are expected to support a further recovery.

With the inflation outlook substantially higher and the economy showing resilience, the rate increase was needed to reduce the risk that elevated energy prices spill over and become generalized inflation, he said.

Uncertainty remains elevated, he added. Developments in the Middle East and Canada-US trade relations are fluid, and there is also uncertainty about the impact of new US tariffs and how much energy costs will seep into consumer prices more broadly.

He then outlined what the Bank is seeing in the economy and what lies ahead in coming months.

Growth in Canada picked up through the middle of the year. GDP increased 3.3% in the second quarter, and recent indicators point to growth of about 2% in the third quarter. Consumer spending has been solid even with slow population growth. Business investment rebounded, reflecting oil and gas sector activity and spending on machinery and equipment. Exports have strengthened despite continued weakness in sectors affected by US tariffs, helped by strong US demand, higher energy production and signs that businesses are adapting to the trade environment. The unemployment rate has stayed around 6½% for several months, and a broad set of indicators continues to point to some excess supply.

Looking ahead, growth will likely slow in the fourth quarter as new US tariffs weigh on activity, but it should pick up again in 2027 as consumer spending, exports and business investment strengthen with support from fiscal measures, Macklem said.

After GDP growth of 1% in 2026, the economy is projected to expand about 2% in 2027 and 2028. That would absorb the remaining slack. While uncertainty is high, the overall growth projection is somewhat stronger than the July Report's, he said.

With oil prices and refinery margins elevated, CPI inflation has been around 3% since April and is expected to rise to about 3½% by year end, Macklem said. Inflation is projected to stay at or above 3% through much of 2027 before returning close to the 2% target by the middle of 2028. Near-term inflation expectations among households and businesses have risen, while longer-term expectations remain well anchored.

Against that backdrop, Governing Council weighed two options: holding the rate or hiking it.

The argument for holding was that the rise in inflation has so far been concentrated in energy prices and in services that rely heavily on energy inputs, such as airfares. CPI inflation excluding gasoline is still 2.2%, and core inflation measures are close to 2%. Growth has also been better than expected, but slack remains and new US tariffs will weigh on growth.

The argument for hiking was that energy prices are higher, are expected to remain higher and are building cost pressures. As the Bank has said for some time, the longer energy prices remain high, the more likely those costs will spill over to consumer prices broadly.

Gasoline, diesel and heating oil prices are considerably higher than in July and are expected to stay higher for longer, Macklem said. That is hitting consumers directly and raising business costs for production and transportation. Imported industrial and electronics input prices have also risen. Businesses have mostly absorbed higher input costs so far, but past experience and Bank surveys suggest cost pass-through will increase over the next year. Higher energy prices combined with pass-through make inflation more persistent, and with the economy expected to recover, there is less downward pressure on prices to offset those cost pressures.

With elevated inflation expected to last longer and the economy showing resilience, Governing Council agreed that risks to inflation had increased and there was less scope for monetary accommodation, Macklem said. Future decisions will be taken one meeting at a time, and further rate increases could be needed, but the Council will proceed carefully given the uncertainties.

The Bank remains committed to maintaining Canadians' confidence in price stability through this period of global upheaval.

Macklem closed by saying he and Senior Deputy Governor Rogers were pleased to take questions.